Friday, August 16, 2013

Value vs. Getting What You Pay For

I only have a short post today, as work has picked up, and a lot of my free time is going towards planning for my section hike on the Appalachian Trail at the end of this month. Also, I wanted to announce that I just joined the Yakezie Challenge.

My wife and I recently were discussing two of our favorite ideas over coffee: value (which we think of as getting more than you paid for), and the contrary idea that you do, in fact, get what you pay for. Being frugal, we are naturally drawn towards value because we love the idea of getting more than a dollar's worth for our dollar. But it's clear to me that we have a bias. We overvalue the value, per se. And we have a lot of examples of the opposite thing being true. I buy the inexpensive drill bit and, yes, it breaks. The brand name drill, however, is still running after 15 years with no signs of slowing down.I think I am drawn to each idea for different reasons. I like the concept of getting what you pay for, because it's an absolute: I am drawn to the principle of a relationship between price and worth. And value is an attractive idea for the opposite reason: because if a price has no necessary relationship with an item's worth, then there is a way to optimize. I can make purchases that hit a sweet spot between price and worth, and it's a variable concept: I also get to decide how well I did.

So, for some Friday fun, let's do a quick breakdown.

The Logic of Getting What You Pay For
I am drawn to the idea that you get what you pay for, for the same reason that I like the idea of efficient markets. Just as a stock price at all times reflects all publicly available knowledge about a company, at this moment and tomorrow and a year from now, so too does the price of a consumer good more or less reflect its true worth. It's like a grand unifying theory of consumer economics.

Manufacturers & distributors try to extract maximum profits, consumers simultaneously exert downward pressure on prices, and the number at which these groups meet is the right price. Any variations are random. So I know this jar of Classico pasta sauce really should cost $3.50 and this jar of Ragu should cost $1.75 because it's exactly half as good. I can spend twice as much, and get twice as good a pasta sauce. Or I can deal with a sauce that's only half as good, but I get to keep half my money. There is no wrong decision. I can't mess up, and the only real decision I have to make is how much money I want to spend and how tasty a dinner I want to eat.

The grand theory runs into a jam, though, when the store across the way starts selling Classico for $2.50 and Ragu for $2.00. Not only is the true price for each jar now in question, but so is the ratio between the two. At this second store, all of a sudden Ragu is half as good but only 20% less, and no one should ever buy it. Realizing that consumer markets can't be completely efficient, if they ever were, I now have to start considering the idea of value.

The Allure of Value
There is a part of me that loves the idea of value, too, because it gives me more power as a consumer. I can be strategic in my purchases and get more for my money than I did yesterday, or more than my neighbor does tomorrow. The concept of getting more than you paid for opens our spending habits into a bit of a competition. I can track my purchases and learn that Classico usually sells for $3.50, wait for a sale, and then buy in bulk when it sells for $2.50. That creates value, and that's a good purchase...right?

The rub is that value only exists in relative terms. $2.50 a jar is a good deal in comparison to the $3.50 it was selling for last week. So, $2.50/jar = value. But what happens if the price goes down to $1.99 next week? Did I no longer get a good deal last Friday?

And what about knock-off brands, that claim to be as good as the original? If the Safeway sauce is 30% less than the Classico, should I buy it? There's a part of me that knows that it probably isn't going to be quite as good as the brand name but, how much worse? Despite my letters, Safeway still refuses to put clarifying labels on their products as I suggested: "Only 10% crappier, but 30% cheaper than Classico!"
If getting what you paid for is the completely rational and organized world of the US military, where prices and goods march perfectly in lockstep, then the concept of value is a smoke filled pup tent at Burning Man, where prices are, like, whatever you think they should be, brother. If I am high and hungry and I think a jar of Classico is worth $6, and someone is willing to sell it to me for $5 or trade it to me for my five dollar flip flops, then hey, I got a good deal! I got good value because the price was less than I thought the thing was worth, right?

Wrap up
I go back and forth on these ideas, because I often find myself cherry picking the ethos that suits my mood at the moment. Yesterday when I bought the deli ham on sale for $4 a pound instead of the Boar's Head at $9 a pound, I justified buying the cheaper item because I believe it presented value. But when I bought the wild Sockeye salmon for $8 a pound instead of the farm raised salmon for $5 a pound, I told myself that I was buying quality, and you get what you pay for.

In reading this post over, the only thing I'm really sure of is that I have a hankering for pasta. I'm not sure either idea works well as a grand unifying theory, but I do find the application of the ideas to be entirely too confusing to consistently know what the price of a thing ought to be.

What say you, readers? Are prices what they should be? Or is the value in the eye of the consumer?

26 comments:

I try to view things as either permanent or disposable. If I only need it once and a cheap version will do, I go for the cheapest possible. For anything permanent, I'll pay for quality because it's way cheaper in the long run. Sorting out what is quality and what is gouging is tricky sometimes, though!

That's a good shortcut to apply one approach vs. the other. Though I agree that it's hard to know when spending more is justified. When the item is 50% more, how sure are we that it's at least 50% better?

My buddy's having a housewarming party and I asked him what kind of liquor he likes...of course he names this crazy expensive blanco tequilla. I'm looking at the tiny $28 bottle and thinking, man, can this really be that much better than the $17 bottle?

I enjoy the discussion. My wife and I tend to have this discussion on a regular basis and I too seem to cherry pick the idea that is most relevant at the time. In America, I have become accustom to understanding value but when I moved overseas it rocked my perspective. It was crazy when (in the tropics) things like mangos and pineapples were 25ct and boxed American cereal was $10. I remember trying to recalibrate my idea of value to new paradigms. Oh yeah, and I think I'm going to go have coffee and pasta now.

Yea, I think value is definitely in the eye of the consumer...and even with an individual consumer, value may depend on your mindset at the time of the purchase (much like your salmon and ham example). And I pay $1.59 for Ragu on sale at Target, though I sometimes buy the generic Target brand for $1.00!

The great thing with food is that you can try out a lower priced product and if you like it fine, and if not you can always continue to buy the expensive non generic brands. I find that value is based on your preception above everything else. It could change for some people once the emergency account reaches a million, but you will not know if you are that type of person unless you save a million first.

I go the ultimate step in frugality for pasta sauce. I buy cans of just plain old tomato sauce. I then just heat it up and add whatever spices I'm in the mood for, basil, garlic, etc. along with any relevant fillers like ground meat, mushrooms, onions. I feel it is worth it because I save money but I can usually craft a sauce that is just as good as anything bought from the store. If I'm feeling lazy, they even make a spaghetti seasoning. Add that to the tomato sauce and I'm done.

I think the comparison to an efficient stock market breaks down because there aren't as many people devoting their lives to properly valuing a jar of pasta sauce as there are with stocks. The stock market is so efficient precisely because there are so many people trying to take advantage of the inefficiencies. The scale just isn't the same for most consumer goods.

On a tangent, your line "a stock price at all times reflects all publicly available knowledge about a company" clearly reflects a belief in purely efficient markets. While I believe that over time the stock market is efficient, I am not of the belief that there are never temporary inefficiencies or that at all times all relevant information is incorporated into the price. I just think that there are so many people trying to take advantage of them that it's almost impossible to out-do all of them on a consistent basis. In other words, it's efficient enough that you're extremely unlikely to beat it over time.

I agree with you on the markets...don't want to give the impression that I think they're perfectly efficient. They are just efficient enough for my purposes so that, like you noted, there's no point in me trying to time & buy for value.

I do wonder why there isn't the same pressure for consumer goods, though. For the average American, they spend way more on consumer goods in a month than they do on investments.

I agree with the first comment. I try to buy a nicer item if it's going to be around for awhile even if it is more money. (Notice I said I try sometimes I just can't help being cheap) But as far as food or anything disposable it is almost ALWAYS the generic or most inexpensive brand I can find. I now like the way generic brands taste better than name brands just because that's what I'm used to.

Hmmm... well, first of all, I'd like to believe that stock prices actually represent the true value of a company, but in this day and age, I think they more accurately reflect the mood of the investing community. I think people buy based on which direction they think it's gonna move, which often has nothing to do with the true value of the thing (think tulip mania in the 17th century, or housing bubble a few years back.)

And in terms of pasta sauce, I generally make enough to last a year with the harvest from my garden. Unfortunately we're out now and the tomatoes haven't even started ripening yet. It's a true travesty to have to pay such ridiculous amounts of money for inferior sauce!

Seriously though, I think my purchasing decisions are somewhat along the lines of Pretired Nick. If I'm buying something that I want to use long term, I don't mind paying more because I see it as an investment. If it's something that will get used once or twice... well, actually I try to avoid buying that sort of thing at all, but you know what I mean.

Food is an interesting question though. More often than not, my buying decisions are more affected by my food allergies than price or taste. (Classico gets a big plus here because they actually list all of their ingredients and don't generally use evil hive producing parsley in their sauces. But I digress again... see what you've done?!?) ANYHOW, I think that in a certain sense, food should be seen as an investment in your health, so I don't mind paying more to eat lots of fresh fruit and veggies.

BUT... I also think that just because something is more expensive doesn't mean it's necessarily higher quality. I guess this is why I tend to do absurd amounts of research before buying anything that really matters.

OK, I'm talking in circles. I think I might go have some pasta as a midnight snack. BTW, Whole Foods brand pasta sauce... well, it may be organic but it tastes terrible! Stick with Classico!

Thanks for the recommendation on the Whole Foods sauce. I rarely go in there but decided that when my wife leaves the country for a while, I'm going to head there on the scooter and try to get smaller quantities of better stuff (better for my health, less waste). I did see their sauce was a pretty good deal, but will steer clear now!

I hear you on the prices being poor valuations at times, especially with the bubbles of the past. At those times, it's hard to believe in efficient markets...

I am glad you figured out and joined Yakezie, lets rock together and all the best. Agree, I try to get generic instead of branded if I can get a better price. Though I would happily buy a branded item if it fits into my monthly budget. I would buy more branded items during the last week of the month based on surplus budget left over for the month, but of course search for the best deals and discounts.

I often buy higher quality items (or lower quality items) because I feel they are a better value. It all depends on what we're talking about...and my mood! Sometimes I'm just cheap and it doesn't matter. =)

For some things, Leslie and I are more than happy to pay for the cheaper alternative. When it comes to electronics and other similar items (that we will use for a long time) we are more likely to spring for the more expensive version if that's what we like more. We believe in saving to buy what we love rather than just getting what we think is "ok" because it's cheaper. Most daily purchases don't really matter to us though.

Yeah, it's kind of a case by case basis it seems. I agree that it's often worthwhile to spring for the more expensive version and sometimes better to just go cheap. I like the idea of a frequently purchased, disposable item being more subject to the bottom line.

I agree value depends on the person's viewpoint, and for me it's often times quality with clothes so I get the most use per cost, but for things such as food it's often quantity since it's just a one time use per cost (though I do look at nutritional value). Loved the BM reference - save the tickets, value almost seems moot during that week since it's a gift economy (at least it used to be, not sure what it's like anymore).

Yeah, my wife didn't love the BM reference since I've never been and I'm just going off of her stories. But it was as close as I could get to whatever the opposite of the US Military world might be like...